How much will my break cost be?
If you want to make a full or partial payment on your home loan, you could be subject to break fees.
Most banks (but not all) have the option to pay off a small amount of your home loan without any break cost, for example 5% of the loan balance, but anything more than that and you are generally subject to break fee assessment.
Break fee assessment does not necessarily mean you pay a break fee. Let me explain.
Break cost calculations on your home loan can change every day and are driven by three things:
- Amount of loan being repaid (note this can be different to the total loan amount if only partial payment). The higher the lump sum payment, the higher the potential break cost.
- Time remaining until expiration. The longer the time remaining until the current fixed period ends, the higher the potential break cost.
- This is probably the most important of factor… Movement in wholesale interest rates since you fixed the loan. If rates have moved up, generally there is no break cost. If rates have moved down, your break cost starts to get more substantial.
Point #3 above is so important that I’ll elaborate a bit further here. It is the change in wholesale interest rates that matter which make up part of the banks own funding costs. The movement in wholesale rates can be different to the advertised housing interest rates that you see and are offered from banks, although they are highly correlated over the long term.
At the time of writing this, we have just been through an increasing interest rate cycle so there’s a good chance that if you fixed your interest rates in the last couple of years and you were to make a lump sum payment right now, there would be no break cost.
If interest rates do start moving down like they are expected to, we may start seeing chunky break fees coming back into the equation.
So how much will my break cost be?
It’s impossible to say as they can change every day and depends on an individual customers specific loan details. Speak with your mortgage adviser about how you could be affected by break fees as they may or may not be applicable to your home loans.